Ackman may struggle to raise $1 billion in less than 10 days

July 10, 2013|Reuters

By Svea Herbst-Bayliss

BOSTON, July 10 (Reuters) - Hedge fund manager WilliamAckman's strong returns have made him into one of Wall Street'sbiggest managers, but even he may struggle to raise $1 billionin the next week for a single stock fund whose target he won'tidentify, say investors.

One of his clients, the Public Employees RetirementAssociation of New Mexico, which first invested with Ackman'sPershing Square Capital Management in 2010, has already said itwill take a pass on the new special investment vehicle,unwilling to hand over so much cash for such a long time.

"We were notified of the PS (Pershing Square) specialvehicle, but will not be investing as it has a longer lock-upthan what we'd like," said Jason Goeller, who oversees hedgefund investments at the $13 billion pension fund.

Ackman, an activist investor whose taste for shaking upstaid corporations has earned clients an average 16 percent ayear over his firm's eight-year lifetime, set the $2.25 trillionhedge fund industry buzzing this week with his latest offer: anew special investment vehicle with a three-year lockup untilSept. 30, 2016.

In a letter, seen by Reuters, he says it will pay off "if weare successful in effectuating change." He will not name thecompany for fear of having someone else step in front of him andhe has put an usually aggressive timeframe - 10 days - onraising the $1 billion needed at a time investors are takingmore not less time to finalize investment choices.

A spokeswoman for Pershing Square declined to comment.

Calling the offer "a big ask" and comparing it to writingAckman a "blank check", a handful of industry investorsspeculated that many potential clients will say no just as NewMexico is doing.

"This is going to be a much tougher slog than when he raisedmoney for the fund that invested in Target," said a person whoallocates money to hedge funds but did not want to be identifiedas he mulls his own allocations. He was referring to one ofAckman's previous special-purpose vehicles that invested withretailer Target and had to be shut down after 90 percent of themoney was lost.

While losses in the Target-only fund were accelerated by theuse of options to leverage the bet, Ackman is doing itdifferently now. "We do not intend to use a material amount offinancial or option leverage, if any," he said adding that ifthe uses options to acquire the stock of the unnamed company,they will be converted to stock as soon as possible.

The Target fund is a black mark on Ackman's record, but hisother special-purpose investment bets on Sears and Burger Kingfared better.

Even though a good number of investors may shy away becausethe proposition appears risky, there is bound to be interest.

"This is a bet on his investment acumen," said StewartMassey, chief investment officer at Massey Quick which investswith hedge funds for individuals and institutions.

This year's returns are modest - up 6.3 percent after feesin the first half while the broader Standard & Poor's 500 indexgained 12.6 percent - but Pershing Square's long-term returnsare among the best in the industry.

"People want to feel like they are part of something specialand this can make them feel that," said one person who has moneywith Ackman now and speculated on how the money raising may go.

Besides betting on Ackman's reputation, they may also likethe lower fees he is offering. Management fees for thisinvestment are 0.25 percent per year, down from the industry'straditional 2 percent fee. Incentive fees, normally 20 percentor more, can be as low as 5 percent if an investor puts in $200million or more.

Another trend that might help Ackman is a general shift inasset allocations in the wake of the recent bond market drubbingwhere investors are saying they are taking fresh interest instock pickers. Activist hedge funds, which normally bet onstocks, are especially popular, and profitable, right now withassets having climbed six-fold to $73 billion over the lastdecade, data from Hedge Fund Research show.

Indeed if this fund raising effort is successful, expertssay Ackman could strike at some of the industry's very largestcompanies that have long been inoculated from activists' becauseof their size.

"There is probably room for activism at large capcompanies," said Damien Park, managing partner at consultingfirm Hedge Fund Solutions. "And while it will be tough to goafter these companies, Ackman has the appetite."